The proposed changes would cause the Buffets, et al, to pay their equitable share of taxes on capital gains.

Attention all attorneys, CPA’s and investors I would like your input on this Capital Gains tax proposal. Senator Marc Rubio is talking about changing it. Well here’s my proposal hoping to make it equitable for everyone.

CAPITAL GAINS (LOSSES) TAXATION!

DEFINITION: A capital gain or loss is the difference between the cost of a capital asset and the proceeds received from the sale of that asset.

DISCUSSION: If one purchased a capital asset in 1955 for $1,000 and sold it in 2012 for $11,000, he or she would have a nominal capital gain of $10,000, but the “economic gain” would be less. The economic gain can be calculated by translating the 1955 dollars into 2012 dollars. Assuming the CPI (consumer price index) ratio of the 2012 to the 1955 is 15.0, the adjusted (real) cost equals $15,000 ($1,000 x 15.0); therefore the transaction would have resulted in an economic loss of $4,000 ($11,000 less $15,000). If the tax code specified that there would be no distinction for capital gains from other income, the taxpayer would have to pay tax based upon a $10,000 gain. I think that result would fall within the “insult to injury” genre.

If one purchased a capital asset in 2011 for $1,000, and sold it a year later in 2012 for $11,000, he or she would have a nominal capital gain of $10,000, but the economic gain would be less, based upon the “translation” of 2011 dollars into 2012 dollar. Assuming inflation for the year of 2%, the cost would be adjusted to $1,020 ($1,000 x 1.02), thus there would be an economic gain of $9,980 ($11,000 less $1,020).

Many years ago, in an effort at mitigating this inequity (effects of inflation), Congress legislated that capital gains would be treated differently from other income.

Congress should have legislated that the base cost be adjusted (translated) into current dollars, but it, recognizing the problem and wanting to mitigate the unfairness, took an easy, but illogical and short-sighted route by providing an arbitrary 50% (this has varied – current tax is 15% of the gain) reduction in the amount of the nominal gain that would be subject to income taxes. Using the two examples (indexing), each would be taxed at 50% or $5,000, thus the 1955 purchase would suffer an economic loss of $9,000, while the 2011 purchase would enjoy an economic gain of $4,980. The obvious inequitable results are due to using the artificial and arbitrary 50%.

There are short-term and long-term capital gains. Currently, a capital gain is long-term if the sale takes place more than one year after the purchase. Only long-term capital gains qualify for this beneficial tax treatment.

The current holding period of one year to establish the status of “long-term” appears to create the atmospheric conditions, which might act as a catalyst to stimulate market highs and lows for the purpose of creating long-term capital gains, thereby converting ordinary income into preferentially treated long-term capital gains.

Artificialities are not good and will most likely be accompanied by unintended consequences. One of those “unintended” consequences, which is massive, enables the Mitt Romney’s, Warren Buffett’s, et cetera to pay effective tax rates of 15-20%. Another “unintended” is massive as well, i.e., the treatment of the gains on stock options granted to employees of corporations.

The lure of profit should be sufficient to entice investments in capital assets. This lure is, also, attributable to short-term capital gains.

CONCLUSION: I, strongly, suggest that legislation be passed to eliminate the current taxation of long-term capital gains and to initiate a method of taxation that would index the base cost of a capital asset. The adjusted gain or loss would be treated as ordinary taxable income or loss. This change would probably eliminate a great deal of the creativity of tax planners and by Wall Street, which would be beneficial to our economy, and would mitigate the manipulation of the markets.

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